52.242-3
Penalties for Unallowable Costs
Do not include expressly or previously determined unallowable costs in indirect cost or final pricing proposals—doing so can trigger repayment obligations, interest, and penalties up to double the disallowed amount.
Overview
- FAR 52.242-3, Penalties for Unallowable Costs, requires contractors to exclude unallowable indirect costs from certain cost proposals and warns that penalties apply when they do not.
- The clause is aimed at protecting the Government from paying costs that are prohibited under FAR cost principles or agency supplements.
Key Rules
- Definition of Proposal
- A "proposal" includes a final indirect cost rate proposal submitted after the contractor’s fiscal year for costs tied to billing rates or final price negotiations, and the final statement of incurred and estimated costs under an incentive price revision clause when used to set final contract price.
- Prohibition on Including Unallowable Costs
- Contractors must not include any cost that is unallowable under FAR Subpart 2.1, applicable FAR cost principles, or executive agency supplements.
- Penalty for Expressly Unallowable Costs
- If the contracting officer finds a cost is expressly unallowable, the contractor owes a penalty equal to the disallowed cost allocated to the contract plus simple interest on any overpayment, using Treasury-prescribed rates.
- Penalty for Previously Determined Unallowable Costs
- If the proposal includes a cost previously determined unallowable for that contractor, the penalty is two times the amount of the disallowed cost allocated to the contract.
- Finality, Waiver, and Repayment
- Penalty determinations are final decisions under the Contract Disputes statute. The contracting officer may waive penalties under FAR 42.709-6 criteria, but paying a penalty does not repay the Government for the underlying unallowable cost.
Responsibilities
- Contracting Officers: determine whether submitted costs are expressly or previously determined unallowable, assess penalties and interest, and consider waiver criteria under FAR 42.709-6.
- Contractors: screen proposals carefully, remove unallowable costs before submission, and repay any disallowed amounts separately from penalties.
- Agencies: enforce statutory penalty requirements under 10 U.S.C. 3748 or 41 U.S.C. chapter 43 through FAR 42.709.
Practical Implications
- This clause exists to deter contractors from shifting prohibited costs to the Government through indirect rate or final pricing submissions.
- In practice, contractors need strong internal cost allowability reviews, especially for indirect cost rate proposals and incentive contract closeout submissions.
- A common pitfall is assuming that removing a questioned cost later avoids consequences; if the cost was included and found expressly or previously unallowable, penalties and interest may still apply.